Proposed Federal Rules Would Bar Excessive Executive Comp

Federal financial regulators are taking aim at large compensation packages paid to non-executives at financial institutions, such as the huge payments made to the president and other top officials at American International Group’s Financial Products unit.

In regulations proposed on March 30, seven federal financial services regulators would bar incentive-based compensation that are excessive or that “could expose the institution to inappropriate risks that could lead to material financial loss.”

The federal agencies involved in the joint rules-making include the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union Administration, and the Federal Housing Finance Agency.

The regulations require disclosure of incentive-based compensation arrangements for top executives. The rules also establish special rules for institutions with assets of more than $50 billion.

They also require the boards, or committees of boards of large financial institutions, to monitor and oversee such compensation. And they require deferral of parts of large compensation packages.

The rules were mandated by the Dodd-Frank financial services law.

The provision aimed at AIG would require boards of institutions with assets of more than $50 billion to identify those persons (other than top executives) who can expose the institution to possible losses “that are substantial in relation to the institution’s size, capital or overall risk tolerance.”

The proposed rules would require that the board of directors, or a committee of the institution, approve the incentive-based compensation arrangement for non-top executives, and maintain documentation of such approval.